Tuesday, April 15, 2008

Are we there yet?

It seems every week I read some Realtor’s report of the market turning around. It’s usually full of colorful realtor-speak like “there’s never been a better time to buy”, “if they wait they’ll be sorry”, “long term, real estate is your best investment” and my current favorite, “Scraping along the bottom”. The funny thing about bottoms though, they’re not all flat. One second you are cruising along the abyssal plain and the next second you fall into the Marianas Trench and get crushed like an old chevy at a monster truck rally.

Has SoCal hit the bottom? Is it really a great time to buy? I seriously doubt it, and here are just a few reasons why.

The first reason is a simple one. This bubble like nearly all bubbles will probably fully implode (When most bubbles implode they tend to overcorrect a bit). Prices in SoCal have tripled in the last 10 years. Even if they were to fall 50% they would still be well above pre bubble levels. They need to fall about 66% to drop back to pre bubble levels. Can they fall that far? Sure they can. Will they? I doubt it in most cases, because there would have been some normal appreciation on those 10 years. Given a normal 3% appreciation they would need to fall about 55% to get back into the normal range. According to most charts, the decline in the IE is currently averaging about 30%. That would indicate we have about another 25% to go.

Reason number two is probably the biggest factor keeping me from believing there is a bottom anywhere close. There is still a gargantuan amount of distressed properties hitting the market (foreclosures people!). The foreclosure numbers are through the roof and still accelerating. There is no hope of this trend reversing any time soon. The peak of the subprime rate resets runs right through the end of this year. The foreclosures are another 6 to 9 months behind that. Then there is the Alt-A wave, which runs through late 2011. Many of those properties will already have sold or walked away from long before then so I’m not expecting that wave of foreclosures to rival the current one, but there will certainly be some.

The shear number of distressed properties on the market make any hope of recovery about as likely as Ron Paul being elected President. In Feb nearly 50% of the homes sold in the IE were foreclosures, last month it was almost 60%. That number is probably only going to go higher. Until those are worked out of the system there is little hope of prices going anywhere but down.

Reason number 3 is related to reason number two. The prices are still in a nose-dive. People know this and will continue bidding low. Currently median in the IE has dropped 27.2% in the last year according to the California Association of Realtors. If the prices are still falling how can we have hit bottom?? When the prices start to rise again (for at least 3 months in a row) we can start talking about the possibility that we hit some sort of bottom.

Reason number 4 is the inventory levels are still way too high. The current IE inventory is somewhere close to 50,000 units. Last month we sold just over 3000 units. That equates to a 16.6 month supply. Most realtors will tell you that a normal balanced market has about a 6 month supply of inventory. We are currently running 2 to3 times that amount. The inventory might fall as the summer hits but come fall it is likely to skyrocket again (like it did last year).

Reason number 5 is the overall economy is not looking very healthy. It’s all but certain we are in a recession. Jobs are being shed and buyers are being lost. As more and more “regular” buyers are lost that will leave a larger percentage of investors. Today’s investors are looking for deals. They are only going to buy properties if the prices are low enough so as to pencil out as an income property. Currently very few properties fall into this category. Most smart investors will look for small, inexpensive homes. These are cheaper to maintain and easier to rent. Those big 3000 s/f (and bigger) homes will sit and sit until the prices fall because investors don’t want them and the regular buyers can’t afford them at the current prices.

Reason number 6. I just asked my Magic Eight Ball and it said “outlook not so good”. Who can argue with that!

And finally, lucky #7. AFFORDABILITY. Even though homes have fallen substantially in the last year, affordability is still very, very low. In California it’s something like 24% that can afford the median home (up from 14%). Median income is still under $60k in most areas. The new median of $309k in Riverside is still over 5 times the median income. Riverside County median price was traditionally under 3 times the median income, until this bubble hit. At 3 times the median income the median home would be roughly $180k. Even I’m skeptical it will fall that low. But if it follows its usual pattern it will fall back into that price range eventually (3X the median income).


ButterMonkey said...

Reason #8. The repo homes aren't going anywhere any time soon because the dumbass banks can't figure out how to price things.... or, they're smoking crack and think they're going to get their money back. LMAO to that thought! They'll get a clue in a year or two when the buyers finally out wait them.

Firsttimebuyer said...

Anyone see the commercial for the "buy a foreclosure" government tax incentive?

I think it was saying something like $7K?

That might help closing costs, but that won't help much when the house price depreciates.

More first time home buyer incentives are needed!

Thanks for posting all this info. I've been reading for a couple months. Keep it up!

If you have first time homebuyer advise let me know.

Santa Ana River Rat said...

Unemployment is on the rise, fuel price is up and that's causing everything else to go up. Dollar is losing its value faster than we can spend it. I don't want to get into politics but I get the look of "I told you so" from my libertarian friends lately. People are still spending beyond their means. If we buy a house at current level, even most current buyers are buying beyond their means. however $100 sqft does sound reasonable within the current median income level. As for the banks...let's be real...it's run by bunch of suits who really don't know about selling houses at all. They are only interested in recovering the lost money and frankly I think it's the realters who need to wake up and realize that it's not 2006 anymore and start letting the bank folks know the chance of recovering most of their money is impossible.

golfer_X said...

The prices that the banks put on the homes are usually the result of a brokers price opinion (BPO). So it's usually a realtard that is telling the bank to price the homes too high. Part of the problem is that there are few sales to use as comps (especially true in high price areas) and the other part is that they are realtards and have an interest in keeping the prices as high as possible.

On the economy, did anyone else ready that the MGM/Mirage hotel group just layed off 400 mid level managers? 4 freeking hundred!

It must be the end of the world...

ButterMonkey said...

You guys, the banks do rely on the realtards for pricing suggestions, but in the end, the bank has the final say. A good friend of mine is trying to sell a couple of REO homes, notice I said SELL, and each time she's suggested a price to move the home, the bank has said, "Nope, higher. We want to try to recover our money." One such place she suggested a price of $325k and the bank said $405K. Now, I know she can just refuse the listing, but it's not like she has a whole lot of sales going on at the moment that she can just walk away to IYKWIM.

Sellin @ Da Drop said...

A good indicator of a bottom: Prices have stopped dropping 5k a month continuously (e.g.Riverside), have remained stable for at least 6 months and inventory is actual decreasing. There is your trifecta.

Santa Ana River Rat said...

well greed spreads all directions. The banks want to get their money back, brokers want to keep the pricing high and the people still buying beyond their means. In the meantime my wife tells me one of our neighbors, who is a realtard and a real terd, is losing his house. I usually don't like to laugh at someone else's misery but LOL!

xin said...

You are right on the mark. Here in San Mateo the prices are just beginning to drop, and my coworkers and friends are starting to feel like they're getting a bargain by offering 800k on a 1.2 million house. I am staying the hell away from the falling market for a while.

I'm Not POTUS said...

There is another factor that will target the bottom. I call it the "Prop 13 Relocation Put"
The IE counties have finally gotten around to adopting the transfer provision for retirees. Now an empty nester can transfer the property tax value they pay in LA or OC to a place in the IE. So, I expect that those that sat on their hands for the last 10 years and did not touch the equity they built up need to sell, they will be motivated and capable of offering rent equivalent prices.
I'm talking about Gramps and Grampa who still only pay $450 a year in property taxes. Bought a 3/2 place in LA or OC for $20,000. They sell for 320,000 in LA/OC. Go to the IE pick up a reo for 200,000 and pay $450 a year in taxes. And have $100 k for expenses.

bigdog76 said...

I thought I would post the Highlights of The Foreclosure Prevention Act that I read in my City news paper examiner they leave on my door step every week.

FHA loan limit increased from 95% to 110% of the median home price, with no dollar cap at $550,000. Down payment of 3.5% required, with counseling.
$4 billion will go to communities with high foreclosure rates to purchase, rehabilitate and sell homes.
$100 million will be spent on pre-foreclosure counseling.
Mortgage lenders will have to provide mortgage disclosures 7 days before closing rather than 3 days before closing to allow time to shop for a new loan.
Lenders will have to disclose the maximum possiable monthly payment after reset. Violations will be fined at ten times the old rate.
Veterans returning from service have 9 months of nonpayment instead of the usual 3 before foreclosure proceddings can begin. They also have a year's grace before mortgage rates can reset.
A standard housing deduction of $500 for single filers and $1,000 for joint filers will be added to the non-itemized 1040.
$10bn of Federal-tax exempt private bond authority for financing first time buyers and refinanced mortgages. Theses bonds are also to be AMT except.
Homebuilders and other specific business will be given an extention of net operating loss carry back, allowing them to use 2008 and 2009 net operating losses against taxes paid back to 2004, allowing them to collect refunds of taxes already paid.
Buyers of foreclosed homes will receive a $7,000 tax credit over two years.

With all this said. What is your take?
I am tired of the Government bailing out big business. This country was founded on by the people for the people. I just heard Mccain said he would help theses finanicial instutations in his plan What is that all about? Why do they keep bailing all theses companies.
Now I do like the $7,000 tax credit. How do you fill this will affect the foreclosures Let me know your take GOLFER X. Weigh In?

golfer_X said...

On the bailout,

I doubt the bailout plan would help very many people in Cali. It also assumes people want to keep their overpriced homes. Now that the chance of making a quick $100k is gone how many of these people are going to want to stay in those homes. Not nearly enough to help, that's how many. In CA I doubt it will have much effect anyway. The values have fallen so far that most homes are so upside down they will never be able to save them.

The last attempt at helping raised the conforming limit. That happened months ago, and there are still no loans avail over $417k without the rates being higher.

Sure a 7K tax credit is great but it's not going to make many people pay an extra $100k for a house.

Bailing out the banks sucks BUT the sad fact is they don't have a choice. You can't let the financial system break down. Like it or not they have to save the banks (at least the big ones). It's not unheard of for the gobment to save failing businesses. They did it with Chrysler in the 80s. But they need to implement some controls on the banking system to control this type of speculative lending.

I don't think anything they do will stop the correction. It's needed because homes are out of whack with incomes. The prices have to come back to the long term mean price. The more they try to prevent it the longer the correction will probably take. Personally, I wish they would just sit down, leave it alone and let it correct. If they want to be useful, come up with some laws to make sure this crap can't happen again in 50 years.